Three Thoughts

February 8, 2016

On U.S. Politics:

Beware the role of the party spoiler.  The 2000 presidential election result hinged on the Florida vote and Supreme Court interpretation of that state’s ballot.  Fewer than 1,000 votes separated Bush from Gore, while Ralph Nader siphoned off 97,488 votes in the Floridian state count, mostly from Gore.  Spoiler candidacies fought on principle lack a history of success or even near-success in the peculiar way that U.S. presidents are chosen, and the history of them is that spoilers damage the mainstream candidate with issue stands that are closest to the spoiler.  2000 was hardly the first instance when a bit player without any chance of winning drove national policy further away from their own position.  When Teddy Roosevelt, with former presidential experience of over seven years, unsuccessfully challenged his successor and then incumbent, William Taft, for the Republican nomination, he ran anyway as a Progressive.  Together, Taft and Roosevelt captured 50.6% of the popular vote the Woodrow Wilson’s 41.8% on the Democratic side, but the Roosevelt-Taft electoral vote total was just 96 versus Wilson’s 435.  In 1992, fiscal hawk Ross Perot won zero electoral votes but took almost 19% of the popular vote.  Bill Clinton as a result translated a 42.95% plurality of the popular vote into 102 more electoral votes than the incumbent, George H.W. Bush.  Bernie Sanders crusade in 2016 is reminiscent of Nader’s in 2000.  Voters beware.  A throw-away vote on principle usually winds up being a vote for the candidate one prefers least on the issues.

On Economics

Central bank policymakers customize monetary policy to their own economy only at their own peril.  There were several inherent dangers when the FOMC went ahead with an interest rate hike last December.  First, U.S. real GDP growth had slowed appreciably from annualized 3.9% in the spring of 2015 to 2.0% during the summer and only 0.7% in the autumn.  Second, U.S. inflation was still far beneath the central bank target of 2.0%, and disinflation (that is, a slowing rate of rise in general prices) was the more prevalent price trend globally than inflation.  Third, the bad history of other central bank authorities that during the past 15 years had tightened monetary policy prematurely in places like Japan, Norway, Denmark, Sweden and even the ECB only to be forced to reverse course subsequently, was disregarded.  The United States is wholly different than those precedents, so the thinking went, and not tightening in the seventh year of economic expansion risked losing credibility.  What preserves long-term central bank credibility ultimately avoiding policy changes that with hindsight are not second-guessed.  And this trap evolved because the Fed weighted its decision heavily on its expectations regarding domestic factors, even though the main source of disinflation in the U.S. and world is being caused by global developments. 

On the U.S. Stock Market’s Slide

The Dow today plumbed to within less than 1% of last August’s low of the correction of 15,666.  The rule of thumb that a 10% slide from peak represents a correction and a 20% drop is needed to constitute a bear market is overly simplistic and, in the present case, misleading because it removes the all-important dimension of length from the determination.  A better delineation of a bear market from a bull market is the trend over a long-term span of time.  Another better approach is to ask whether or not the drop in share prices is associated with a recession or undesirably slow expansion, and on both of these measures, the recent behavior of U.S. markets deserves the bear market label more than some widely acknowledged bear markets of the past.  From a low of 777 in August 1982 to a high of 11,723 in January 2000, the the DOW soared at rate of 16.9% per annum over a period of 17-1/2 years, and there was only comparatively mild recession in those years.  The length of time clearly constituted a long run, and the market behaved like a bull.  To be sure, 1987 saw the DOW drop 36% from 2722 on August 25 to 1738 on October 19.  Although that decline can be found in lists of U.S. 20th century bear markets, the slide was compressed into less than three months.  Five-eighths of the drop occurred on the final day, and the bear market was not associated with any recession.

Now most commentaries these days that ask whether the current slide in share prices will evolve into a bear market by extending through the 20% threshold note that a bear market is overdue given the 7 years since the last bear market.  Such thinking misses the point by considering March 2009 the start of the present stock market upswing.  A better view of what’s happened to stocks emerges when one looks at the entire time span since the January 2000 peak that ended the last long-run span of bull market conditions.  From then to now, the DOW has only risen 1.9% per year over 16 years.  There have been two recessions, the second of which was very severe.  1.9% share price appreciation wasn’t enough to cover inflation and to ensure that equities enabled savers to reach their goals within a long-term span of time.  The doldrums since 2000 are hardly the first example of a lengthy period with woeful appreciation in equity values.  Similarly disappointing results occurred in the 1930s and from December 1961 to August 1982.  What investors are feeling now is for all intents and purposes part of a prolonged bear market with the same trappings that characterized the 1960s and 1970s, and most would take the brief free fall of 1987 any time over what’s happening now.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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